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NISM Certifications · NISM-Series-XV: Research Analyst · Company Analysis - Financial Analysis

Asha Textiles has sales of Rs 600 crore, net profit of Rs 48 crore, total assets of Rs 400 crore and shareholders' equity of Rs 160 crore. Using the DuPont framework, what is its return on equity?

ROE is 30%. Net margin of 8% multiplied by asset turnover of 1.5 and equity multiplier of 2.5 gives 30%, which matches net profit of Rs 48 crore divided by equity of Rs 160 crore. Ignoring leverage would give only the 12% return on assets.

  1. A12%
  2. B30%Correct
  3. C8%
  4. D15%

Explanation

Net margin = 48/600 = 8%. Asset turnover = 600/400 = 1.5. Equity multiplier = 400/160 = 2.5. ROE = 8% x 1.5 x 2.5 = 30%. Check: 48/160 = 30%. The 12% option is margin times turnover (ROA) and omits leverage.

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